The first non-introductory chapter starts off with a bang: cases where running role-played simulations beat expert opinions in predicting conflict outcomes. Fascinating. In the chapter, Armstrong asserts with ample evidence that when two parties are in conflict, specific forms of role-playing are more effective at predicting outcomes than simply asking the experts. He lists five scenarios, a drug company board handling a recall, an appliance manufacturer negotiating sales with a supermarket chain, a nation handling an artist protest, journal editors renegotiating their contract with their publisher, and the NFL negotiating with the players association.

All of these examples were real events, and expert opinion as well as multiple role-playing simulations per scenario were run before the outcomes were determined. Ultimately, role-playing out performed expert opinion by a wide margin. On average, expert opinion was right 16% of the time while role playing was right 56% of the time, and strictly chance was correct 25% of the time, so expert opinion was actually worse than chance on average. Makes you rethink listening to political or financial news.

Armstrong’s chapter in Principles of Forecasting goes into much more detail than I do here and is well worth reading. It’s apparent that even role-playing is by no means an accurate predictor even in the best of scenarios, but it clearly is better than expert opinion in predicting how parties resolve a conflict. I can’t help but hypothesize that a cognitive bias is at play here, the empathy gap bias. Most decisions are ultimately made based on emotions, and unless you attempt to simulate the emotional state of the decision makers, you will be missing key information in making a prediction. The best way to empathize with someone is to put yourself in their shoes, and Armstrong notes the importance of realistically simulating the decision environment with all the key decision makers as much as possible.

Where does this seems directly applicable? Merger arbitrage was the first that came to mind for me. But I’m sure anyone playing with prediction markets could have some fun as well. I suspect that markets often react more to expert opinion than well run simulations, so there should be cases where markets will get it wrong, but your simulations may just get it right a little more often. The next time you want to predict if two companies will come together, and there’s substantial money on the line, think about hiring some actors and running a few simulations as opposed to listening to that well paid consultant who knows the industry “inside and out.”

Photo Credit: tinmachine / photocase.com

The post How Your Role-Playing Friends Beat Experts at Predicting Conflict Outcomes appeared first on Valuable Behavior.

Here’s my take. There’s some good points to the Church of Lean Startuptology, but I do hate the jargon. Cults love jargon as it’s a great way to build a code language that acts as a secret handshake/shibboleth. I hate the fact that I agree with a lot of their ideas, but wish I could make the packaging a little less Amway.

One specific instance where I’m a fan of the concept but not the term is “Customer Discovery.” A friend of mine thinks that the proper term that worked just fine before a fleet of consultants with eyes calling you into the desert to tell you they had found the one, true way, was “market research.” I agree. The lean startup folks do have some wonderful points to make about modern day market research. Specifically, why on earth would you spend time building something if you don’t have reasonable data showing that people will buy it?

Good, modern day market research tools are fantastic. The arsenal at your disposal is enormous: scouring through what people are searching for on Google, running test websites with AdWords campaigns and measuring how many people would actually buy it if you built it, A/B testing product features, analytics pouring through all parts of your retention funnel, running free simian surveys to see what people actually want. However, the old rules of market research still apply. Steve Blank harkens back to an older time by saying, “Get the heck out of the building, and talk to your potential customers, you lazy bum.” (So, I might have misquoted and turned him into some sort of Lean Startup Burgess Meredith, but I like that image better.)

Focusing on your market versus focusing on your engineering finally clicked for me when I began to merge my two separate professional lives, one as an investor, one as an entrepreneur. I finally started connecting the two when I realized that I was falling for the traps as an entrepreneur that I would never fall for as an investor.

Good market research is doing your homework to reduce risk. Don’t build something because you think it’s cool; get actual data suggesting how many people would really buy it. Similarly, don’t invest in a stock because you love the product; do your homework and get data to help you predict how the business will run in the future. The vast majority of my career as an entrepreneur can be described along the lines of “Oh wow! That’s cool! Let’s build it then see if we can sell it!” This really is akin to buying stock in Crocs or Pets.com because, you just know they’re going to be huge.

Another analogy: good market research is really scuttlebutt. Aye, more jargon. At least it’s old jargon, and there’s not a cult associated with it. Scuttlebutt is a term invented by the legendary investor Phil Fisher in his book, Common Stocks and Uncommon Profits. It’s a good book, albeit a little dated. However, the chapter on scuttlebutt was an excellent insight at the time and still bears repeating. You can actually talk to people about a company to get information, and it not be insider trading. Don’t just go off of numbers; talk to people in the industry, especially friends who are competitors and former employees. You’re bound to learn a lot more about a company and get the full story on risks they’re facing. Similarly, talk to your potential customers. A lot.

And that’s basically what Steve Blank and Eric Ries have been proclaiming for the last decade in the realm of entrepreneurship. As first and foremost a software developer, it’s hard for me to hear what they have to say, possibly another reason why I find lean startup jargon so irritating. My unfortunate first reaction in entrepreneurship is to build, Build, BUILD, just as a poor investor’s first reaction to a good press release is to buy, Buy, BUY! It’s not rational, it’s not good business, but there will always be people heading in the wrong direction in both areas no matter what time period we’re in. I’ve had to rejigger my brain from that of an engineer, to that of a scientist, constantly studying what people will really buy. It’s a simple shift to say, but one I’m still in the process of making.

If you’re interested in more jargon laden, yet still useful reading with more specifics, I’ve found The Thoughtbot Playbook to be a really good, free guide to the essentials of customer discov… err… market research and then some. It’s short and without a lot of fluff, but you will have to wade through some jargon. But, it’s also a great read for even old school investors to understand what the heck those moon people in Silly Valley are up to. Charlie Munger would enjoy.

Also, I’m in the process of being a reformed “Build it! I Know It Will Be AMAZING!” entrepreneur. I’d love to hear from you any other books worth reading or other insights. Leave a comment or find me on twitter if you liked the piece, have questions, or just want to share your favorite Lean Jargon™.

Photo Credit: AllzweckJack / photocase.com

The post Customer Discovery, Scuttlebutt, and Moon People appeared first on Valuable Behavior.

Keep the iPhone out of the bedroom.

Do not charge it there, do not leave it there, and for the love of God, do not take it to bed with you.

iPhones are powerful contraptions. Addictive, seductive, and to quote the colorful Scott Hanselman, they have forever changed the way we poo. I also fear, it’s forever changing how we sleep. I think a comic from chewingfat.co explains it best.

You’ve probably seen the RPI study on backlit devices (TL;DR: backlit devices mess with your melatonin, most likely keeping you up longer), but I don’t think it stops there, at least with me. I think my brain is constantly searching for more dopamine, which in turns makes it crave more dopamine, and having access to the internet at night has been a losing proposition for me for the past ten years. There’s always something more I need to read, something more I’m missing, that next article will give me the piece of technological insight I’ve been needing all this time.

No, it won’t. Sleep is a much better investment of my time. And besides, I’m not going to find what I’m looking for on Hacker News.

However, telling myself this at 2 AM simply doesn’t work. The desire to refresh the latest NYT headlines is just too strong. This was a case where I needed to apply a little BJ Fogg-iness and not attack the problem head on (that usually ends badly) but rather design around it and change my environment. Fortunately, putting a door in my way and forcing me to leave bed at an ungodly hour is rather odious. One experiment with leaving my phone out of my room proved me right. I went to bed earlier, I got up earlier. Very few things in life have instantaneous effects like that for me (the only thing close was when I discovered Counter Strike in college… but that had an instantaneous effect in the opposite direction).

After a week I discovered something else, too. I suddenly had an extra 30-45 minutes in the morning. Before when I would wake up, I’d check Facebook, check the NYT, check email, slowly drag myself out of bed, then scramble to start my day. Instead, I suddenly and leisurely found the chunk of time I’ve always wanted for meditation. I’ve never been able to meditate for longer than 10 minutes at most, feeling that I NEEDED to be working soon, or I was wasting time. Suddenly, 30-45 minutes appeared where nothing was expected of me. So, I was sleeping more, and finally meditating? Either I’d stumbled upon something insanely valuable, or some symbiotic microbe had taken hold of my brain and turned me into some sort of adult.

I’m still not sure how something like this happened with one small change, but it makes you think. I’ve probably tried thousands of little hacks in my life, especially around sleep. None were as effective as this.

I’m sure many of you have a few objections to this, though. Those without landlines may be a bit afraid in case there’s an emergency. I’m sure if you’re enterprising enough, Google Voice with dirt cheap pay-as-you-go phones, keeping your phone outside but within earshot, or just getting a landline will remedy the situation. I’ve also had fear grip me when I can’t capture a late night idea in Omnifocus, but a notebook and Sharpie on the bedside table does the trick. Given how my mood and work improves when I do get eight hours consistently, I’d say that getting a good night’s sleep is probably the best use of my time… way better than catching up on reddit.

Full Disclosure: I have a confession to make. I haven’t been sleeping well these past few months and definitely haven’t been meditating. However, that is likely due to my eleven week old daughter. Getting sleep in this new environment… still working on that one.

The post Where to Stick Your iPhone appeared first on Valuable Behavior.

Before we begin talking about investing with SEO, you need to understand how it works. Two great places to start; both worth reading.

Beginner’s Guide to SEO by SEOMoz - SEOMoz is kind of like the Apple of the SEO world. They have the shiny, beautiful products, but they make you pay for it. However, in this case, they have some really nice free info to draw you into their wonderful, expensive web of SEO tools. So yes, the intro is good. And has monkeys. And if you become a pro, their tools actually are worth it.

Also, for more detail, but with less monkeys, Search Engine Optimization For Dummies ( Kindle Version ) - Dummies books… can be hit or miss, but this one does a great job of being written for everyone and can even give you the nitty-gritty details that most free guides will gloss over, but you still need to understand. This is where I gained a great deal of my SEO knowledge.

So, now that I can assume you’ve had a few trysts with keywords, PageRank, and backlinks, time for actually learning how to date a keyword.

Holy Cow, it’s a Market!

The web, from the perspective on a value investor, can be thought of as one large market, where the assets are keywords, the income stream is the amount and quality of the traffic the keyword generates (as good, relevant traffic can be readily convertible to dollars with products or ads), and the amount of effort and time it takes to get your page to rank highly for a keyword is the price. Value investing bells should be ringing. Look for low cost (easy to rank for keywords with something valuable to sell) with high, stable income streams (high traffic, relevant people who may buy something). The best part is that there are likely, millions of opportunities, but that’s not to say it’s easy. Like any real investment opportunity, this isn’t lather, rinse, repeat, profit.

SEO is a Long Term Investors Market

What makes me enjoy it even more is you have to think like a long term investor when dealing with SEO. While many marketing teams and hyperactive companies enamored with quarterly earnings focus on pay per click advertising with SEO riding second, SEO once built and hardened after a few months is a true passive income stream requiring little investment assuming your original value proposition remains intact. How often do you click on a Google search ad vs. the first result of your search? Exactly. This is a long term investment, the better investment, and one with years of income.

Match.com for Keywords

So, where can I find a list of keywords relevant to my niche? The first and free place to start is the Google Keyword Tool. It’s a wonderful tool as you can get a rough idea of the relative values of what people are actually searching for. I won’t go into all the details, as most guides hit this pretty clearly, but be sure to pay attention to broad vs. exact phrases and the fact that the data in it isn’t accurate. It does give you a good idea of which keywords generate more traffic relative to other keywords, allowing you to find the best ones to use on your site. Also remember competition listed is AdWords competition, not SEO competition. What you really want to know is SEO competition; how likely will your page rank for this keyword. We’ll get to figuring that out in a bit.

Next up on the list are the keyword search tools, an area I really wish would clean up its marketing. I use Market Samurai, though some people swear by Micro Niche Finder or SEO Cockpit. All of these tools annoy me, even though I still use Market Samurai. They all are marketed like get-rich-quick, late night TV schlock, but they do work. Market Samurai works by scraping Google’s keyword tool, mashing it up with some data from Majestic SEO, and generally making keyword research go a lot faster. The others do something similar. You can get a really good idea of what people want to know in a particular search niche and whether you can offer something better than what is currently available.

Finally, SEOMoz wins again with tools that make searching and tracking keywords relatively easy, though for my initial research, I still prefer using one of the previous tools and following up with SEOMoz (back when I had a subscription).

How Do I Know If A Keyword Is The One?

Keyword Analysis used to be easier. See how many sites were using the keyword in anchor text, in the title, and in the URL using Google’s search modifiers inanchor, intitle, and inurl, and if it came back with a low value (especially single digit) for the keyword using all of them, then you’re likely to rank well pretty easily once Google indexes your site after you’ve done a little optimization (i.e. what you just searched for). It’s still a useful metric to look at (both MNF and Market Samurai give this sort of data in one form or another). I like places with only single digit numbers of pages with the usual SEO optimization, but you have to hunt to find ones with significant, relevant traffic. However, you’ll also find areas where it can be tough to rank even if the basic optimizations are low as you could be going up against sites with high PageRanks or authority.

If you find one of these low competition niches that you’ve determined has relevant traffic as well, you’ve found one of Warren Buffett’s “Cigar Butts,” i.e. overlooked yet still worthwhile assets that actually have some value left. These aren’t going to make you rich, but with only a modest bit of effort, you can rank for the keyword.

But sometimes, you do have to enter the fray, in which case, new rules apply. Google’s job is to help searchers find the highest value content possible and in 2011 and 2012, they made huge strides with numerous updates in cutting down on the amount of keyword stuffed, paid for backlink, black hat spam that used to pop up. (I’m noticing eHow isn’t as prominent as it used to be when I search, THANK GOD!) So if you’ve determined that the value of the keyword is worth it, how do you go about showing Google that you’re to be number one it it’s heart?

Don’t Pay for Love from Keywords; Give Love to Get Love

This really is “Can’t Buy Me Love.” You can simulate being cool to get Google to like you, buying backlinks from less than reputable places, throwing the same smelly keyword anchor text all over the web, but you’ll end up throwing poo all over your friend’s house, and Google will smack you down after all the abuse. Like I said, this is a long haul. Put your energy into building relationships with expert sites/bloggers in the field, really understand what you’re talking about, and make sure you deserve the number one spot. Spending all your time trying to look cool (and it’s often hard work as well) is likely a fool’s errand. Google continues to refine their Rube Goldberg contraption of machine learning and Bayesian filters into a finely honed BS detector that though not perfect, keeps improving.

And that’s the main point. Google will continue to improve. Tricks that work now, may not later. The nice thing about good SEO practices is that they don’t go out of style. By providing something truly useful, becoming a contributing member of the community of experts around you, and actually trying to help people who are searching better than anyone else, things will fall into place. You should ask for links from the expert’s sites, but to do so, you have to have the goods, too.

Once again, this is long term relationship building, not one night stands, so if a keyword has the traffic you’re looking for, and cigar butts won’t work for you, you have to put in the effort. It’s kind of wonderful to see an area where the principles of value investing apply so nicely. Then again, I’ve come to believe value investing applies pretty much everywhere.

If you have any questions on SEO, leave a comment or send me a note Twitter or FB. I’d love to do some more SEO article follow up on places many folks would find useful. There’s a lot to the subject of SEO. Let me know where I can help out.

Photo Credit: uli franke / photocase.com

The post SEO Investing, Cigar Butts, and Not Making Love Like Patrick Dempsey appeared first on Valuable Behavior.

I know, I know. More of that hippie, happy, positive psychology that plagues blog posts on entrepreneurship scribbled all over Hacker News. Trite. Overused.

And rarely followed.

Just realizing how much rat racing I do in my life (i.e. someone who puts off things that make them happy for tomorrow’s happiness) and how it really isn’t getting me far. I read first about the problems with delayed gratification years ago in Tal Ben Shahar’s book, “The Question of Happiness.” I was surprised when my organizational psychology professor friend recommended the book to me as it looked straight out of the bargain bin section of Half Priced Books, right next to “How to be A Ninja Assassin Even if You’re Some White Guy” by some white, bearded guy named Stephen and possibly some of David Allen’s early work. However, Shahar’s book was pretty simple, had some good data behind it, and seemed to jibe with my intuitive sense of happiness. One of the main takeaways; you’ve got to enjoy with what you’re doing now, or you ain’t gonna be happy.

One of my real joys in life is writing. Like a true Rat Racer, I stopped writing blog posts for fear that it was pulling me far away from where I felt I should be, getting a small company off the ground. Instead, I gave up one of the most powerful tools to solving incredibly difficult problems, writing about them.

You can enjoy your life AND get a business off the ground. Now, I’m saying this as I’m struggling to do just that and as everything else I’ve helped start required more sacrifice than I’m willing to give now, but I’m still betting on the fact that it’s right. The best way to put long hours into something is if you’re enjoying it. Ask Yo-Yo Ma.

None of this is new. None of this you haven’t heard before. I’m just saying it a little differently, mostly as a reminder to myself.

To provide a variation on another overused example, sometimes being the kid who eats the marshmallow first is good, as long as you find vitamin packed razzmatazz marshmallows of awesomeness. Said another way using the Hacker News parlance of the time, product/founder/market fit doesn’t just exist in a vacuum. It’s also a good idea to enjoy the act of creating the product, if you want it to work out.

The post Love Racing Rats appeared first on Valuable Behavior.

After a bit of a hiatus, I’m glad to return to this blog. I have a new experiment to write about. For the next few months, I’m going to be trying to improve the quality, amount, and speed of the feedback we get as we build our business, Dogpatch Technology.

One of the biggest problems in investing is the sheer time between when you make a decision and when you see true results. It’s often on the order of a decade or two if done with the usual “buy and hold an amazing business for as long as you can.” And, it’s one of the primary reasons why investing principles seem so simple, yet are often hard to apply. Whether the topic is investing, engineering, medicine, or almost any other endeavor, the sooner we receive high quality feedback on what we’re doing, the sooner we can adapt, and the better we do. However, this can’t come at the expense of taking a long term perspective, and you have to ensure that feedback is high enough quality to take that into account. Paying attention to Graham’s “weighing machine” inputs and not the “voting machine” inputs is at the heart.

With this experiment, there’s going to be less emphasis on investing, and more emphasis on entrepreneurship, engineering, design, and all those aspects of actually running a business. You’ll probably see some things here you won’t normally see on your usual “analyze a company a week” investing blog, and I hope you’ll find it useful. Investing makes us better businesspeople and business makes us better investors. There are principles we’ll hopefully investigate in this blog that are universal to almost every discipline and industry (feedback being one that’s pretty hot at the moment). I hope we’ll be able to hit on more than a few.

So put on your micropreneur hats, get comfortable with the technology industry, and let’s see where the latest research into behavior change and feedback loops takes us.

Time for some fun.

The post Feedback: The Name of the Game appeared first on Valuable Behavior.

Killing the yield curve is going to seriously hurt banks as they’re trying to regain capital. However, this too shall pass. Strong, well capitalized banks not entirely dependent on the yield curve will make it through this and may even clean up the  wreckage. Woe be to anyone not buying quality. Buy the superstars that you can understand and think really long term. And make sure they can make it through the storms in the short term.

Instead of spending your time ranting about the Fed, run your stress tests, start digging, and maybe pickup some more shares of your favorites on your shopping list.

Back to fun with Ruby on Rails, CSS, and dreaming about having capital.

The post A Quick Thought on “Twist” appeared first on Valuable Behavior.

My main insight from this last vacation: it’s time to focus. Meaning, this blog will be taking a backseat to the rest of my work life until the business we’ve wanted to build is up and running.

I’ve learned that the most successful blogs publish on a regular, specified basis.  If you plan on blogging and want to be successful, go all out and publish regularly so people can expect you at a set time each week. Come up with well thought out content each time. In other words, if you’re going to do it, do it right and do it consistently.

And that requires time. Time I want to spend building a business first and then transitioning to investing and writing.

I’ll still be posting here, albeit on an irregular basis as my full effort will be devoted to building our software business. There may be more of an entrepreneurial slant, like how searching for good SEO keywords is similar to finding Graham net-nets or that Flippa.com is a really interesting market for a type of security called a website with thoughts on how to value one.

I’ve realized, I’m not ready yet for this blog, nor investing in general to receive my full attention. But, I can’t wait to return to it with a whole, new amount of useful content and a business standing behind it.

See you soon,

Palmer

The post How to Stop Writing Blog Posts and Focus appeared first on Valuable Behavior.

The post Vacation! appeared first on Valuable Behavior.

Sticking to Quality

Valuations of distressed banks are something I can’t claim to do well because leverage is involved.  Even with average banks, I’m a little skeptical, as it’s pretty easy for any bank to lose it’s footing and zoom all the way to zero.  So, if I’m valuing a bank, I’m valuing the ones that meet my criteria of being a good bank.  There’s always a non-zero chance that you’re going to lose your entire investment, which is why banks, even the good ones, need more of a margin of safety than other investments.  Fortunately, since they’re a boom and bust industry with an enormous amount of fear and greed attached, good banks’ stock prices often fall to a margin of safety more often than normal companies.

What’s my Earning Power, Again?

Bank earnings can be pretty lumpy, so averages are your friend.  The kind of earnings we like best are ones without too many peaks and valleys, but sometimes that’s not the case, even for well run banks if they’ve had a number of acquisitions or found their Fannie Mae preferreds worth a whole lot less than expected. (Management got an F- for the quarter for that one.  DARN you Valley National!  Didn’t own any at the time, but they were on my good list.  Still are, I suppose, but I’m keeping one eye on them.)

The best way to get a handle on a bank’s normalized earnings, is by finding the ten year average ROAA and multiplying it by the present assets.  Ten year ROAA generally gets a complete business cycle (boy, it does for this past decade, for sure) and should be a pretty good metric of how much a bank can presently earn on its assets. I focus on banks that have at least a ten year ROAA above 1.0%, and usually a bit more than that.

Growth is Good.  Slow, Steady Growth is Better.

Once you have your normalized earnings, you have half of what you need for a DCF calculation.  So, what about growth? Simple.  Don’t go over 8% short term.  And long term, don’t go over 6%.  This is not a growth industry.  You’re going to see times when good banks will be able to take advantage of financial carnage and grow at some pretty decent clips for a year or two, but these are met with long periods where nothing is on sale, loan margins are tight due to greedy empire builders, and a bank will have a tougher time drumming up quality business.  The best banks understand that growth for growth’s sake is a bad idea.  Growth is good, but not at the expense of quality or profitability.

Also, since we’re using DCF, I find that using growth rates above 8% leads to some rather large differences when you change a single value by a little bit, so I generally try to keep my growth levels pretty low when using it.  DCF is not a very good model for higher growth companies. (But then again, what is?)

Ultimately, I usually use 6% short term (first five years) growth and 6% long term growth for a great bank in a good area.  Less if I’m worried about the area’s prospects.  If a bank has some great growth prospects, I’ll bump the short term growth up to about 8%.

I use 15% as my discount rate as 15% is a return I am very happy with and is a good bit more than a decent bank’s cost of capital. This helps me build in an initial margin of safety.  I then look for a 20% margin of safety once I run the DCF calculation.  This may seem low, but remember I’m using a 15% discount rate, so I consider a lot of safety already built in.

This ultimately leads to liking normalized bank P/E ratios of about 9.5 to 10.5.  Which means, if it’s a good bank, my buy threshold is around 10 times normalized earnings, and if it has some great growth prospects, I’ll go to 11. (Feel free to insert your own “Spinal Tap” reference here.)

A Little Bit of Fudging

Banks that keep some extra dry powder should be rewarded in their valuation.  Here’s how I do it:

Under certain circumstances, if I think a bank has some extra cash on its balance sheet, I’ll subtract the excess cash from the market cap to give it a pseudo enterprise value. To figure out if I think bank is overcapitalized, I’ll take the amount of tangible common equity and loan loss reserves that are over 10% of tangible assets, and I’ll treat it as excess cash on the balance sheet. For example, for a bank that has $15 million in tangible common equity and loan loss reserves against $100 million in tangible assets, if I know the bank is a fabulous underwriter, and management has shown they are not the sort to let excess cash just sit without returning to shareholders, I’ll subtract $5 million from the bank’s market cap.  The condition of it being a great bank with prudent management is a requirement before we can enter this excess capitalization into a bank’s value.  Every now and then, this adjustment lets me buy a great bank I think is selling for 12x or 13x earnings.

The Requisite Example

Hmm. What’s a great bank on sale right now?  We’re right on the threshold for many, but we’ll stick with my usual favorite, US Bank.  US Bank’s 10 year ROAA is about 1.66%. Given the last decade, that’s a pretty awe inspiring number.  USB has about $311 billion in assets, meaning a normalized earnings of about $5.16 billion.  USB is a little light on the capitalization side (as it’s always been), and it’s not something I’m going to hold against it, but I wouldn’t say it has excess cash on it’s balance sheet with $26 billion in tangible equity (Note, that the real ratio would use tangible COMMON equity, which is even less than tangible equity. Oy vey.) and loan loss reserves versus the $300 billion in tangible assets they have.

So, with a market cap of about $44 billion, USB has a normalized P/E  of about 8.5.  Prices for a bank this stellar are pretty spectacular, even if the macroeconomic world we’re facing gets worse.

The 10-10-10 Method

Know what I usually do to value a bank quickly?  I call it the 10-10-10 method.  I ask myself three questions: What is the rough average ROA for the past ten years?  Is the market cap less than ten times the normalized earnings?  And, is there any excess capital over 10% that I need to figure in?  This method makes it pretty easy when you’re scanning through your list of great banks, looking to see what’s on sale without having to pull up a spreadsheet.

Now that your armed with the banking analysis series (parts 1, 2, 3, 4) and a quick means of valuation, by all means, go out and clean up in the market.  There are some bargains on fantastic banks to be enjoyed, so happy hunting.

Say howdy to me on Twitter (@truelson) with a shout out about how you liked this article, assuming you did.  I still haven’t setup the whole Facebook “like” thing yet here.  I probably ought to do that.  And, please drop me a line at truelson (-at-) dogpatchtech.com with any questions you have.  I love hearing from people, and hope I can write even better articles y’all might like.

Photo Credit: fertnig / iStockPhoto.com

Full Disclosure: I own USB (surprise, surprise).  I have no position in VLY.

The post Bank Valuation Made Simple appeared first on Valuable Behavior.